California’s Contractor Law Stirs Confusion Beyond the Gig Economy

Image

A protester at Uber’s office in San Francisco in May. The company said it would not treat drivers as employees, defying an effort in California to extend protections to independent contractors.CreditCreditJustin Sullivan/Getty Images

SAN FRANCISCO — After months of bickering over who would be covered by a landmark bill meant to protect workers, California legislators passed legislation on Wednesday that could help hundreds of thousands of independent contractors become employees and earn a minimum wage, overtime pay and other benefits.

But even before California’s governor, Gavin Newsom, had signed it into law, the battle over who would be covered flared up again. Uber, one of the main targets of the legislation, declared that the law’s key provisions would not apply to its drivers, setting off a debate that could have wide economic ramifications for businesses and workers alike in California, and potentially well beyond as lawmakers in other states seek to make similar changes.

“California sets off a chain reaction,” said Dan Ives, a managing director of equity research at Wedbush who tracks the ride-hailing industry. “The worry is that the wildfire spreads.”

In California, religious groups said they feared that small churches and synagogues would not be able to afford making pastors and rabbis employees. Winemakers and franchise owners said they were worried they could be ensnared by the law, too. Even some of the contractors for the app-based businesses that have been at the center of this debate said the change could hurt them if companies like Uber, Lyft and DoorDash decided to restrict how often they could work or cut them off entirely.

Under the bill, workers are likely to be employees if the company directs their tasks and the work is part of the company’s main business.

California has at least one million workers who work as contractors and are likely to be affected by the measure, including nail salon workers, janitors and construction workers. Unlike contractors, employees are covered by minimum-wage and overtime laws. Businesses must also contribute to unemployment insurance and workers’ compensation funds on their employees’ behalf.

For months, lawmakers have jockeyed to exempt a variety of job categories, including doctors, insurance agents and real estate agents.

Carrying out the mandate will most likely be anything but orderly. Companies in dozens of industries must decide whether or not to comply pre-emptively or risk being sued by workers and state officials. Some workers may find that their schedules and job descriptions change, while others may be out of a job altogether if their employers cut back hiring amid rising costs.

Mr. Newsom has said he intends to sign the bill but has indicated that he would be open to negotiating changes or exemptions with businesses like Uber and Lyft if they were willing to make other concessions. That has added to the air of uncertainty about the law.

Litigation is also likely to follow.

Uber said Wednesday that it was confident that its drivers will retain their independent status when the measure goes into effect on Jan. 1. “Several previous rulings have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces,” said Tony West, Uber’s chief legal officer. He added that the company was “no stranger to legal battles.”

In order to classify drivers as contractors, legal experts said, Uber would also have to prove that it didn’t direct and control them, and that they typically operated an independent driving business outside their work for Uber.

Historically, if workers thought they had been misclassified as a contractor, it was up to them to fight the classification in court. But the bill allows cities to sue companies that don’t comply.

San Francisco’s city attorney, Dennis Herrera, has indicated that he may take action. “Ensuring workers are treated fairly is one of the trademarks of this office,” he said in a statement.

And California may be only the beginning, as lawmakers elsewhere, including New York, move to embrace such policies. Legislators in Oregon and Washington State said they believed that California’s approval gave new momentum to similar bills that they had drafted.

“It makes everyone take notice,” said State Senator Karen Keiser of Washington, whose Legislature could take up the measure next year. “It’s not just a bright idea from left field. It gives it a seriousness and weight that is always helpful when you’re trying to pass a new law.”

While much of the debate about the California legislation has been about the impact on fast-growing businesses like Uber, Lyft and DoorDash, it could apply to many kinds of employers, including those that long predated the so-called gig economy.

Religious groups said some congregations would struggle to pay for full employment benefits for their leaders if they were converted from independent contractors to employees.

“For smaller ones that operate on very small budgets, it could force them to lay off their rabbi or maybe only hire them part time,” said Nathan Diament, the public policy director for the Orthodox Union Advocacy Center.

Even drivers for Uber and Lyft have been split on the bill. Some of them visited lawmakers’ offices in Sacramento to plead their case for employment status. Others objected to the bill, worrying that it would take away their ability to switch their work on and off just by opening an app.

“I’m torn. Drivers are so split on the issue,” said Harry Campbell, a driver and the founder of the publication The Rideshare Guy.

Uber and Lyft have long maintained that converting drivers to employees would most likely require the companies to schedule drivers in shifts rather than allowing them to decide when, where and how long to work. While nothing in the bill requires employees to work scheduled shifts, in practice the companies may want to restrict drivers from working when there are few customers and the revenue that drivers bring in would not offset the hourly costs of employing them.

After New York City enacted a minimum wage for drivers this year, Lyft put such restrictions in place because having too many drivers on the road without passengers could significantly raise the minimum wage the company had to pay under the city’s wage formula.

“Drivers will have some restrictions,” Mr. Campbell said. “The question for me is whether it will be worth it for all the drivers to have protections.”

But some traditional businesses have argued that the mandate merely levels the playing field. Construction companies have long complained that they face unfair competition from rivals that classify workers as contractors so they can avoid paying payroll taxes and lowball bids on projects.

App-based companies are “starting to send carpenters, electricians, plumbers off their platform — independent contractors who make very low wages,” said Robbie Hunter, the head of the state building trades council that represents construction worker unions in California. “They’re undercutting brick-and-mortar businesses doing the right thing — paying for workers’ compensation, being very efficient, working hard to make a profit.”

In other cases, the new law has created anxiety and confusion.

Small vineyard owners are concerned that they could be forced to directly employ the independent truckers they use to haul their harvests and become responsible for providing insurance and workers’ compensation. Currently, truckers operate as contractors, with their own rigs and insurance, and serve several vineyards, said Michael Miiller, director of government relations at the California Association of Winegrape Growers.

“Our members are growers, not trucking companies,” Mr. Miiller said. “The target of legislators is Uber and Lyft, but the unintended victims are small, independent vineyards on the coast of California.”

Saunda Kitchen owns a Mr. Rooter plumbing business in Sonoma County that has 30 employees, for whom she pays payroll taxes and provides the various mandated benefits. But Ms. Kitchen said she believed that she herself would have to become an employee of Mr. Rooter under the new law, which could cause the parent company to pull out of the state.

“I wouldn’t have access to new technology, training, help with marketing,” said Ms. Kitchen, who planned to talk with Mr. Rooter officials on Thursday about how to proceed.

But Steve Smith, a spokesman for the state labor federation, which advised lawmakers on the bill, said he did not believe the vineyards or Ms. Kitchen would be hurt by the law.

“We’ve seen no cases of legitimate franchisees being targeted or having any issues at all with the test” in other contexts, he said.